Retirement System Board of Trustees and Employees Prudent Investor Act

Retirement System Board of Trustees and Employees Prudent Investor Act

Summary

This Act promotes security, stability, and accountability in state retirement systems. A trustee or director of a state retirement system must comply with a series of prudent investor guidelines. These guidelines include risk and return objectives, diversification, loyalty, investment costs, compliance, and delegation of management functions.

This Act shall be known and may be cited as the “{insert state} Retirement System Board of Trustees and Retirement System Employees Prudent Investor Act.”

Model Policy

Section 1. {Prudent Investor Rule}

(A) Except as otherwise provided in subsection B of this section, a trustee or director of any {insert state} retirement system who invests and manages, or delegates the approval of the investment or management of retirement system assets owes a duty to the beneficiaries of the system to comply with the prudent investor rule set forth in the “{insert state} Retirement System Board of Trustees and Retirement System Employees Prudent Investor Act.”

(B) A trustee or director or retirement system employee is not liable to a beneficiary or state taxpayer to the extent that the trustee, director or retirement system employee acted in reasonable reliance on the statutory provisions and rules of the retirement system. A trustee or director or retirement system employee who exercises reasonable care, skill, and caution in performance of actions as a trustee or director or retirement system employee is not liable to a beneficiary for the actual investment return results or retirement system operational results.

Section 2. {Standard of Care – Portfolio Strategy – Risk and Return Objectives}

(A) A trustee or director or retirement system employee shall invest and manage or approve the investment and management of retirement system assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the retirement system. In satisfying this standard, the trustee or director or retirement system employee shall exercise reasonable care, skill, and caution.

(B) A trustee or director or retirement system employee’s investment and management decisions or approval of investment and management decisions respecting individual assets of the retirement system must be evaluated not in isolation, but in the context of the retirement system’s portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the statutory and rules governing the system. Investment and management decisions shall be made on an impartial basis.

(C) Among circumstances that a trustee or director or retirement system employee shall consider in investing and managing retirement system assets or the delegation of approval of investing and managing retirement system assets are those of the following as are relevant to the retirement system or its beneficiaries:

(1) General economic conditions;

(2) The possible effect of inflation or deflation;

(3) The expected tax consequences of investment decisions or strategies;

(4) The role that each investment or course of action plays within the overall retirement system portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;

(5) The expected total return from income and the appreciation of capital;

(6) Other resources of the retirement system on behalf of beneficiaries;

(7) Needs for liquidity, regularity of income, and preservation or appreciation of capital; and

(8) An asset’s special relationship or special value, if any, to the purposes of the retirement system or to the beneficiaries.

(D) A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall make a reasonable effort to verify facts relevant to the investment and management of retirement system assets.

(E) A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets may invest in any kind of property or type of investment consistent with the standards of the “{insert state} Retirement System Board of Trustees and Retirement System Employees Prudent Investor Act.”

(F) A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall not make a determination to invest or increase the investment of retirement system assets based on ideological or non-financial related criteria for or against specific industries. A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall not make a determination to avoid investment of or reduce the investment of retirement system assets based on ideological or non-financial related criteria for or against specific industries. A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall not make a determination to employ or terminate employment of an investment manager or consultant based on ideological or non-financial related criteria. Prior to a determination by a trustee or director or retirement system employee to avoid investment of or reduce the investment of retirement system assets in a specific industry, or employ or terminate employment of an investment manager or consultant, external expertise from an independent third-party must be consulted. The results and recommendation of the consulted expertise shall be made available for public review.

Section 3. {Diversification}

A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall diversify the investments of the retirement system unless it is reasonably determined that, because of special circumstances, the purposes of the retirement system are better served without diversifying.

Section 4. {Loyalty}

A trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets shall invest and manage the retirement assets solely in the interest of the beneficiaries.

Section 5. {Investment Costs}

In investing and managing retirement system assets, a trustee or director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets may only incur costs that are appropriate and reasonable in relation to the assets of the retirement system.

Section 6. {Reviewing Compliance}

Compliance with the prudent investor rule is determined in light of the facts and circumstances existing at the time of a trustee director or retirement system employee or a trustee or director or retirement system employee who delegates approval of investing and managing retirement system assets’ decision or action and not by hindsight.

Section 7. {Delegation of Investment and Management Functions}

(A) A trustee or director or retirement system employee may delegate investment and management functions. The trustee shall exercise reasonable care, skill, and caution in:

(1) Selecting an agent;

(2) Establishing the scope and terms of the delegation, consistent with the purposes and      terms of the retirement system; and

(3) Periodically reviewing the agent’s actions in order to monitor the agent’s performance      and compliance with the terms of the delegation.

(B) In performing a delegated function, an agent owes a duty to the retirement system to exercise reasonable care to comply with the terms of the delegation.

(C) A trustee or director or retirement system employee of a retirement system who complies with the requirements of subsection A of this section is not liable to the beneficiaries or to the retirement system for the decisions or actions of the agent to whom the function was delegated.

(D) By accepting the delegation of a retirement system function from the trustee or director or retirement system employee of a retirement system that is subject to the laws of this state, an agent submits to the jurisdiction of the courts of this state.

 

Section 8. {Severability clause.}

Section 9. {Repealer clause.}

Section 10. {Effective date.

 

Approved by the ALEC Board of Directors July 1, 2014.

Approved with amendments by the ALEC Board of Directors on October 11, 2014.

Keyword Tags: 2014 Annual Meeting, 2014 STFS, Tax and Fiscal Policy Task Force